Monday, October 5, 2009

Monitoring IV90 Lows in the ETF market and what that means for the broader Equity Market

Before the Meltdown of the last two days the major ETF Classes made IV90 (implied volatility of 90 days) lows or was within a few days of making those lows. The Equity markets are currently very close to year highs. The Implied Volatility in the market had gotten exhausted as the realized market volatility (HV) was underperforming on a broad basis. This pressure keeps pushing the IV90 lower as Implied Volatility comes in across the board. How does a trader or PM see that?

Earlier in the week the landscape looked like this… On this landscape we are looking at several things- First each building represents an ETF (the landscape shows all ETF’s with traded options) and the footprint of each ETF is the end of day (EOD) volume with the SPY leading. The colorfield from red to green shows IV90 trading close to its lows (dark red with the SPY only .73 away from its IV90 lows of the year) and moving farther away from those lows from white to green. Of note is most of the heavily traded (large buildings) are very close to their IV90 lows signaling a new bottom across most of the ETF landscape. The active volume counts the most.

A new picture emerges as the market declines and IV90 starts to bounce off of its lows. This is the exact same landscape 3 days later.

Today, three days later the landscape looked like this….

Note here that the SPY HV90 is now 2.7 points away from its lows (about a 10% increase). The landscape is much “less red and more green” indicating that the market decline pushed IV90 up across the entire ETF universe as IV90 moves away from the yearly lows. The combination of short term Equity highs and IV90 lows is a signal to stay away from selling volatility in the farther out months until a move in the Equity markets occur.